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Garuda stalls multibillion-dollar deal in 'buyers market'

Wed, Jun 08, 2016 - 9:35 AM

PT Garuda Indonesia is in no hurry to finalise a multibillion-dollar order of as many as 250 aircraft, saying the sluggish global economy will give it more leeway in negotiations with Airbus Group SE and Boeing Co.

PHOTO: REUTERS

[JAKARTA] PT Garuda Indonesia is in no hurry to finalise a multibillion-dollar order of as many as 250 aircraft, saying the sluggish global economy will give it more leeway in negotiations with Airbus Group SE and Boeing Co.

Decisions by other airlines to push back purchases amid tough operating conditions give Garuda more breathing space, president-director Arif Wibowo said in an interview in his central Jakarta office on Tuesday. The order is part of the flag carrier's plan to nearly triple its revenue to US$10 billion by 2020.

"It's a buyers' market right now, so I think we have one or two years to see their response," said Mr Wibowo, 49.

"A number of airlines have decided to reschedule their aircraft deliveries, so we have to be tactical in dealing with these two major suppliers." South-east Asian carriers may need to push back delivery of aircraft after a decade of economic growth and optimism about a surge in air travel prompted them to order hundreds of jets, Tony Tyler, chief executive officer of the International Air Transport Association, said in February.

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Garuda has bucked that trend, with its share price surging 55 per cent this year after a turnaround in the carrier's financial results and its inclusion in the MSCI Indonesia Index of mid- to large-cap shares. The airline reported a net income of US$76.5 million in 2015, following a US$373 million loss in 2014.

Mr Wibowo's predecessor Emirsyah Satar, who successfully turned around the state-owned carrier into a regional player, revealed back in 2013 the company's plan to acquire 250 aircraft in the decade ending 2025, with a majority of the order split between Airbus and Boeing.

Garuda has "no appetite" for the A380 superjumbo from Airbus, a plane that would only fit airlines with specific needs, Mr Wibowo said. During the February Singapore airshow, he said the carrier would decide between the A350 and Boeing 787 models this year.

Mr Wibowo, who's been president director since December 2014, said Garuda is completely unhedged in terms of its oil needs at the moment and would only start hedging if the jet fuel price rises to 47.7 US cents per litre. The Singapore jet fuel price was 30 US cents a litre at the end of April, according to information on Garuda's website.

Most of Garuda's expenditure is in dollars, so the trajectory of the rupiah has a major influence on its fortunes. The currency has rallied 3.9 per cent to 13,268 a dollar in 2016 after plunging 34 per cent over the previous four years. The airline would be able to withstand a drop to as low as 15,000, Mr Wibowo said.

As well as boosting revenue, Mr Wibowo is aiming to increase Garuda's net profit margin to 5 per cent by 2020 from 2 per cent last year. He said he's very focused on cost-cutting and would like to ask the manufacturers to deliver their planes unpainted and, in future, without interior fittings. This could save Garuda as much as 15 per cent as its subsidiary, PT Garuda Maintenance Facility AeroAsia, could paint and fit out the planes, Mr Wibowo said.

"In terms of fleet cost, I insist on getting the best deal. Otherwise, I won't buy the aircraft."